PayPoint's (LON:PAY) Shareholders Will Receive A Bigger Dividend Than Last Year

The board of PayPoint plc (LON:PAY) has announced that it will be increasing its dividend on the 30th of September to UK£0.09. This takes the dividend yield to 6.1%, which shareholders will be pleased with.

See our latest analysis for PayPoint

PayPoint's Payment Has Solid Earnings Coverage

If the payments aren't sustainable, a high yield for a few years won't matter that much. Based on the last dividend, PayPoint is earning enough to cover the payment, but the it makes up 210% of cash flows. The company might be more focused on returning cash to shareholders, but paying out this much of its cash flow could expose the dividend to being cut in the future.

Over the next year, EPS is forecast to fall by 5.2%. If the dividend continues along recent trends, we estimate the payout ratio could be 62%, which we consider to be quite comfortable, with most of the company's earnings left over to grow the business in the future.

Dividend Volatility

The company has a long dividend track record, but it doesn't look great with cuts in the past. Since 2012, the dividend has gone from UK£0.24 to UK£0.36. This works out to be a compound annual growth rate (CAGR) of approximately 4.0% a year over that time. It's encouraging to see some dividend growth, but the dividend has been cut at least once, and the size of the cut would eliminate most of the growth anyway, which makes this less attractive as an income investment.

Dividend Growth Is Doubtful

Given that the dividend has been cut in the past, we need to check if earnings are growing and if that might lead to stronger dividends in the future. Over the past five years, it looks as though PayPoint's EPS has declined at around 8.0% a year. If earnings continue declining, the company may have to make the difficult choice of reducing the dividend or even stopping it completely - the opposite of dividend growth.

The Dividend Could Prove To Be Unreliable

In summary, while it's always good to see the dividend being raised, we don't think PayPoint's payments are rock solid. While PayPoint is earning enough to cover the payments, the cash flows are lacking. We would be a touch cautious of relying on this stock primarily for the dividend income.

Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. For example, we've identified 4 warning signs for PayPoint (2 make us uncomfortable!) that you should be aware of before investing. Is PayPoint not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.

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